Foreign banks lust after Australian mortgages

Bank of Tokyo Mitsubishi may have grabbed the headlines last week with a $500 million one-year mortgage-backed loan extended to AMP. The deal marked the long-awaited arrival of Japan’s mega-banks to local mortgage market. But the world’s largest deposit-rich banks have had their eye on our mortgages for a while.

Market insiders say US banking giant Citigroup has been among largest investors in Australian residential mortgage-backed securities (RMBS) offers this year – and sits fourth in the local league tables with involvement in five deals. Citigroup’s buying follows heavy investment from another US banking behemoth – JPMorgan. A large order from the bank’s controversial CIO unit, which in 2012 was tangled up in the ill-fated “whale trade", was a key factor in luring Westpac back to the securitisation markets in late 2009.

Unlike Australia’s banks, which have a structural shortfall of deposits, the big US banks are flush with cash. They look far and wide for safe investments to ensure their excess deposits don’t become a drag on profitability. That’s similar for Japan’s banks, which have realised they have no choice but to look beyond their stagnant economy to deploy excess savings, whether it’s funding European project finance deals, writing corporate loans in Asia Pacific or lending against Australian mortgages. The motive for Bank of Tokyo Mitsubishi dipping its toe into the local home loan market isn’t a sign of ambitions to take on the big four banks in their own backyard. It is a means to get exposure to assets that offer a competitive return of equity. Foreign banks may be tinkering in the mortgage market, but there is no shortage of local financiers to snare a share of an attractive asset class.

Macquarie Group has made no secret of its lust for mortgage assets. In August, it outlined strategic reasons why it wanted to own more mortgages. One is that Australians tend to service mortgages – recent Moody’s arrears on prime loans are an impressively low 1.3 per cent. The other attraction is that mortgages are a “valuable balance sheet" asset that attracts minimal capital and can be used to access funds from the central bank.

Giving money to rivals can be better than writing mortgages

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The bizarre economics of mortgage-backed securitisations is that banks may make higher returns, from offering funds to their competitors in the form of warehouse loans or investing directly in RMBS, than they do from writing mortgages themselves. Warehouse loans and mortgage-backed securities let banks earn healthy margins of more than 1 per cent over the bank bill rate but with less effort, overheads and capital associated with originating mortgages. Securitisation has been trumpeted as a way to increase competition, but its been a handy side business for the big banks that extend short-term warehouse funding to their competitors. Furthermore, banks are encouraged by regulatory terms to invest in RMBS issued by their smaller peers. The widening array of players in the mortgage market comes at a time when the house prices are on a steady march higher.

Evidence suggests that more abundant credit is not a driving force for property, but there are signs that the resurgence in securitisation markets could become a factor.

Last week, two “sub-prime" RMBS offers by Bluestone, returning after a long absence from issuing RMBS, and Resimac garnered strong support from investors. The AAA-rated notes which formed part of Resimac’s $350 million deal, arranged by Commonwealth Bank and National Australia Bank, paid 1.20 percentage points and 1.65 percentage points over the bank rate.

The enthusiasm of private investors to back the “non-conforming" mortgage sector highlights some of the challenges associated with macro-prudential policies. New Zealand and UK regulators, wary of rising property prices, are using or considering imposing lending limits on banks, as a tool to manage property bubbles.

But restrictions imposed on the banks couldn’t apply to non-bank lenders, which are backed in the shadows by the banks, making macro-prudential policies tough to enforce and easy to skirt.